Goldman Says Turkey to Raise Upper Bound of Rate Corridor to 12%

(Bloomberg) -- Turkey’s central bank will raise the upper bound of its interest-rate corridor when it meets on Thursday while keeping benchmark borrowing costs on hold as its reserves and the lira remain under pressure, according to Goldman Sachs Group Inc.

The average cost of cash provided by the central bank was already at 10.39% on Friday, rising from as low as 7.34% in mid-July, as the regulator started to provide funding through the late liquidity window at its highest rate.

That’s one of several signs that it “does not have any room to tighten further inside the current interest rate corridor,” Goldman economists led by Kevin Daly said in a report to clients. The Monetary Policy Committee will likely raise the late liquidity lending rate to 12% from 11.25% on Thursday, they said.

The central bank has opted for a backdoor way of tightening policy while avoiding a change in the key rate even as the lira hit consecutive record lows in past weeks. The benchmark one-week repo rate has been at 8.25% since May and will likely be kept unchanged at Thursday’s meeting, according to most analysts surveyed by Bloomberg.

• Goldman economists said they “do not have a high conviction in forecasting the size of the tightening or how exactly it is going to be administered given the multitude of policy rates”
  • “Still, the authorities’ comments on the competitiveness of lira also suggest that further TRY weakness may be tolerated as long as it is not very disorderly and hence, it is unlikely that we will see a decisive rate hike to arrest the TRY’s slide”
• The central bank “will want to have more room to tighten as the pressure on the reserves and the lira continues, especially considering that these pressures may intensify given a relatively heavy external loan payment schedule and the limited support from tourism is fading in Q4”

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